In this week's newsletter, we provide a snapshot of the principal US, European and global financial regulatory developments of interest to banks, investment firms, broker-dealers, market infrastructure providers, asset managers and corporates.
Bank Prudential Regulation & Regulatory Capital US Banking Agencies Issue
Interagency Guidance on Funds Transfer Pricing Related to Funding and Contingent Liquidity Risks
On March 1, 2016, the US Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and the Board of Governors of the Federal Reserve System issued interagency guidance on funds transfer pricing (FTP) practices related to funding risk and contingent liquidity risk for large financial institutions (i.e., domestic institutions with $250 billion or more in assets and foreign institutions with $250 billion or more in US assets). The interagency guidance describes four overarching principles that banks should use to develop, implement and maintain an effective FTP framework: (i) allocate FTP costs and benefits on funding risk and contingent liquidity risk; (ii) have a consistent and transparent FTP framework for identifying and allocating FTP costs and benefits on a timely basis and at a sufficiently granular level, commensurate with the firm's size, complexity, business activities and overall risk profile; (iii) have a robust FTP governance structure including the production of a report on FTP and oversight from a senior management group and central management function; and (iv) align business incentives with risk management and strategic objectives by incorporating FTP costs and benefits into product pricing, business metrics and new product approval. The guidance notes that an institution's FTP framework should be adequately tailored to its size, complexity, business activities and overall risk profile.
The interagency guidance is available at: https://www.fdic.gov/news/news/financial/2016/fil16012a.pdf.
US Board of Governors of the Federal Reserve Re-Proposes Single Counterparty Credit Limits for Large US Bank Holding Companies and Foreign Banking Organizations
On March 4, 2016, the US Board of Governors of the Federal Reserve System re-proposed rules that would establish single counterparty credit limits for domestic and foreign bank holding companies, as well as US intermediate holding companies, with $50 billion or more in total consolidated assets. The Federal Reserve also released a quantitative impact study that sets out the conceptual and quantitative foundations for the tighter limits on exposures between systemically important financial institutions.
The proposed rule implements section 165(e) of the Dodd-Frank Act which authorizes the Federal Reserve to establish limits on the amount of credit exposure that large domestic banking organizations, foreign banking organizations and US intermediate holding companies (covered institutions) can have to a single unaffiliated counterparty in order to limit the risks in the event of a failure at any such individual firm. The proposed rule builds on earlier proposals for single counterparty credit limits for domestic and foreign banking organizations issued by the Federal Reserve in December 2011 and December 2012 and the Basel Committee on Banking Supervision's 2014 large exposures framework. The proposed rule would impose stringent limits on a firm's exposure to a single unaffiliated counterparty including: (i) covered institutions with between $50 and $250 billion in total consolidated assets and less than $10 billion in on-balance sheet foreign exposures would face a limit on aggregate net credit exposure to any one counterparty of 25% of total capital stock and surplus; (ii) covered institutions with $250 billion or more in total consolidated assets or $10 billion or more in on-balance-sheet foreign exposures would face a limit on aggregate net credit exposure to any one counterparty of 25% of the company's tier 1 capital; and (iii) covered institutions that are domestic G-SIBs as well as US IHCs and the combined US operations of foreign FBOs with total consolidated assets of $500 billion or more would be prohibited from having aggregate net credit exposure to (a) another "major counterparty" (defined as a G-SIB or nonbank financial company supervised by the Federal Reserve) in excess of 15 % of its tier 1 capital and (b) any other counterparty in excess of 25% of its tier 1 capital. Comments on the proposed rule are due by June 3, 2016.
The proposed rule is available at: http://www.federalreserve.gov/aboutthefed/boardmeetings/sccl-fr-notice-20160304.pdf.
The quantitative impact study is available at: http://www.federalreserve.gov/aboutthefed/boardmeetings/sccl-paper-20160304.pdf.
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